Ed Slott: Inflation Has Created an Unprecedented 4-Year Roth Conversion Opportunity

While it's unclear how inflation will affect the two remaining years — 2024 and 2025 — before tax rates are scheduled to increase in 2026, "the tax brackets will still expand some, as they always do for those years as well," Slott said.

Advisors will "probably want to work with clients on a four-year Roth conversion plan (2022-2025) to take advantage of paying low taxes on Roth conversions for each of those years.

Who Should Do a Roth IRA Conversion?

A four-year Roth conversion strategy, Slott continued, would be ideal for clients 68 or younger.

"Even beginning at age 68, in 4 years (ages 68, 69, 70 and 71) substantial funds may be removed from the IRA through Roth conversions, before reaching age 72 when RMDs (required minimum distributions) will begin. That can result in a dramatic decrease in taxes when the client begins RMDs since they will be lower. If everything is converted by then, there won't be any RMDs, resulting in lower taxes for the rest of the clients' life, depending of course on other income," Slott explained.

RMDs and Roth Conversions

Once clients are already taking RMDs from their IRAs, those RMDs cannot be converted.

"RMDs are never eligible to be converted to Roth IRAs," Slott said. "But once the annual RMD amount is satisfied, then any or all of the remaining IRA balance can be converted for that year."

However, "the conversion will effectively still cost more since tax had to be paid on the RMD amount which cannot be converted. That's why it's more tax efficient for most clients to get conversions done before RMDs begin."

Secure Act 2.0

Among the tax proposals being negotiated now in Congress is the sweeping retirement package, Secure Act 2.0, which will likely include a provision to raise the RMD age to 73, 74 or maybe even 75.

If passed during the lame-duck session of Congress, such a change "would expand this window of Roth conversion opportunity," Slott said.

Have the Roth Talk Before Year-End

Slott said the four-year Roth conversion plan "would be a high-value conversation to have now, before year-end with every client who has an IRA."

While not every client should convert, advisors "should bring this tax planning opportunity to each client's attention," Slott advised. "In addition, advisors should get input from the clients' CPAs or other tax preparers who may have a good estimate of their 2022 income level by now for a more accurate tax projection."

One More Roth Conversion Year-End Tip

"If you have a married couple client, where one spouse has died this year, it would be especially smart to not use the 4-year plan, but instead push as much Roth conversion into this year to take advantage of the lower married-joint tax rates on this final joint tax return for 2022," Slott said.

After this year, Slott continued, "that surviving spouse will likely be filing as a single person and paying taxes at higher rates, even with inflation adjustments. A year-end 2022 Roth conversion can save that widow(er) a ton in taxes for the rest of their lives."